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Let’s recap the Federal Reserve’s policy for the past 10 years, as we transition into a new era. Following the 2008 crisis, the central bank initiated three QE programs, starting in November of that year, when they pulled the trigger on purchasing $600B of MBS (Mortgage-Backed Securities).
Next, came the 2010, $600B round of bond purchases. Lastly, in 2012, the FED went aggressive and purchased an additional $1.6T in Treasury bonds and MBS, so that in its peak, the balance sheet reached $4.5T.
Since then, the FED hasn’t embarked on further Quantitative Easing, but it kept re-purchasing maturing bonds, providing liquidity, when the markets showed signs of distress. Just like a father would stand behind his baby daughter, as she climbs a ladder in the playground, to make sure no major accidents happen, the FED was there to lend a hand, when the baby was struggling.
It looks like the father now trusts his daughter to go ahead and climb up, overseeing and monitoring from afar, instead of a applying a hands-on approach.
In the parenting world, we don’t call this process “cheating” because we want to see progress, but we’re not in a rush, so we slowly pull back from our meddling, as soon as we detect maturity. In economics, central bank intervention distorts the natural process of competition, since it helps one person over the other.
The rich, who own financial assets and real estate holdings, enjoyed QE programs far more than the majority of the population, who rely on fixed wages.
Well, starting next month, the FED is, essentially, out of the markets, shrinking its balance sheet by an additional $42B, not buying any significant assets at all. This will show us how strong the demand is for U.S. Treasury debt from genuine lenders, as well as for the global economy, since the BOJ (Bank of Japan) and the ECB (European Central Bank) are also taking a step back, removing their hands from their babies, allowing them to develop or regress, on their own.
You have to wonder about the timing of implementing these strategies, right before mid-term elections, just as America has to decide Trump (Republican), who has been a critic of the FED, or Democrats. The market turmoil isn’t helping the Republican cause.
But, any way you look at it, no central bank purchases represents a major change with our economy.
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For eight years, their biggest dread was deflation, as the system deleveraged. Since 2016, the main concern was with verifying that the economy was ready to grow again. Now, the chief worry is to make sure the economy isn’t getting over-stretched.
Two days from now, I’ll be publishing my personal portfolio trading activity for the past 60-day period in my Dynasty Portfolio, and I can tell you that there’s been an important change in my outlook for the markets.
Since 2009, investors haven’t had to make such important decisions, as they are required to make right now. Back then, investors had to fight-off their fears and, instead, use their reasoning power to judge how discounted some stocks had become. As we approach 2019, investors need to fight-off their fears that interest rates will serve as a dam, blocking the flow of water and drying-up the growth machine, making debt too expensive to service.
Rates are too low to slow down the economy, at this point.
Wealth Research Group sees the coming nine months as one of the most important trading periods in our lifetimes:
- Inflation Surprise: If we see a jump with prices, gold and silver will continue higher, and our watch list, comprised of the top-rated mining stocks on the planet, will surge violently to the upside, like a race dog at the sight of a running rabbit.
- Market Climbs Wall of Worry: As explained many times before, even with the 10-yr bond yield surging higher, it is not attractive, in absolute terms.
Therefore, another option is that investors might not turn their backs on stocks, especially as earnings spreads are about to explode higher, making multiples, such as the P/E ratios, look cheap again!
In this scenario, the big gains will come from the cannabis sector, as the real economy will blast and expand, while Millennials keep getting better employment opportunities and start to spend, spend, and spend. Dividend-paying stocks and the general indices (S&P 500, Dow Jones, and NASDAQ) will be big winners as well.
- Debt and Geopolitics Bring Global Economy Down: In this scenario, which always hovers above us, like an ominous thundercloud, blockchain technology will shine, as a viable replacement to our highly-political, fiat monetary system.
Precious metals will, of course, soar, if the government prints money. Cash will be important, if governments default, rather than print, making cash valuable, in relative terms (debt deflation makes cash stable, compared with crashing equity prices).
The answer to which of these three is going to happen will present itself in the coming weeks, once the elections point the way forward.
This work is based on SEC filings, current events, interviews, corporate press releases and what we’ve learned as financial journalists. It may contain errors and you shouldn’t make any investment decision based solely on what you read here. It’s your money and your responsibility. Information contained in this profile was extracted from current documents filed with the SEC, the company web site and other publicly available sources deemed reliable. The information herein is not intended to be personal legal or investment advice and may not be appropriate or applicable for all readers. If personal advice is needed, the services of a qualified legal, investment or tax professional should be sought.
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